Overseas & overtaxed - An American's tax hell

An American descends into tax hell to avoid becoming a tax evader

An American expat living in London -- sounds glamorous right? Strolling in Hyde Park, hanging with Hugh Laurie in the après theatre scene and sipping tea at Fortnam’s ... Forget it, who has time for that when you've got to file your U.S. taxes?

Ok, after marrying a Brit, my tax experience was never going to be a simple H&R Block, online, click-and-pay procedure again, but I defy any reasonable individual to flip through the 250-page brick of a tax return we filed this year and declare it anything other than outrageously complicated and OTT.

Did I mention it took the two of us several weeks to gather the necessary info and figures for our international finance wizard of an accountant? And before you get the wrong idea, we’re no dummies; between us we’ve got four university degrees from Oxford and assorted Ivy Leagues. But we’re not moguls with a cellar stocked with Cristal either; we’re freelance writers just trying to get by.

This year’s particular brand of Tax Hell included filing more than one Foreign Bank Account Report, aka the FBAR. Haven't heard of it? Wise up. This itty bitty piece of paper could single handedly transform you from a law-abiding Yankee into a full-blown tax evader.

It requires every U.S. citizen or green card holder to disclose the contents of every one of their non-U.S. financial accounts if the aggregate of all their foreign accounts equals more than $10,000 — or risk facing fines of up to $10K per account and massive penalty fees of up to $100,000.

See, America is one of only two countries in the world that taxes its non-resident citizens on their worldwide income (the other is Eritrea), and the dreaded FBAR allows Uncle Sam a peek at every dime, krone and shekel we own.

And here’s the scary part: Uncle Sam now requires foreign financial institutions to disclose exactly how much cash U.S. citizens have parked in their vaults through its new FACTA regulations (Foreign Account Tax Compliance Act). This requires the financial institutions themselves to file a heap of paperwork to the U.S. government. Yes, that could explain those frosty looks we’re getting when we walk into our once-friendly neighborhood banks.

OK, Americans who leave the good ole US of A expect a little tax-filing headache, but let’s talk accountancy fees. This is one cost center that many overlook when mapping out an exotic, overseas lifestyle.

While friends and family at home tell me they normally pay accountants less than $1,000 to fill Uncle Sam’s coffer, filing from the U.K. landed us with a nauseating bill of $3,750 (£2,355) bill – and that’s a bargain compared to last year’s fee of $4,900 (£3,061) charged by a U.K. accountant to do the same job.

Add in filing U.K. taxes and we paid a total of $9,000 in tax prep fees last year. This year that figure will hit around $6,500 reduced through the tactical moves of hiring a U.S.-based accountant to implement the basic exchange rate arbitrage and take advantage of America’s lower accountancy rates. We’ve finally wised up to the fact that U.S.-savvy accountants are in such short supply outside America, that they can get away with charging obscene fees.

Sure, our calculator-slinging number-cruncher deserves to be richly compensated for wrestling with all this outrageous red tape, but staring at the glossy 8X10 of a gleaming yacht positioned prominently on our accountant’s desk, I can’t help but seethe.

London accountants must salivate when they see an American coming; file a gift tax form from abroad and a qualified U.K. account will charge you £500. Kudos to me for skirting that bill and handing the job over to a Boston CPA who happily charged us $200 for the same task. Sure, I attempted to do it myself, but one glance at the 17-page IRS instruction sheet, and I admitted defeat.

After exchanging scores of emails with our new tax code wizard over issues like PFICs, FFAs resourcing income and tax credits to avoid double-taxation, mammoth penalties and jail, it’s become abundantly clear that the U.S has engineered a system that no normal individual can understand.

It’s no wonder that billionaires like Facebook co-founder Eduardo Saverin have given up their U.S. passports and waved goodbye to the U.S. tax filing nightmare. Surely they have better things to do with their time than collate old bank statements and forensically investigate their finances.

Suddenly that $450 fee to give up U.S. citizenship is looking extremely appealing – and perhaps if it weren’t for that mile-long non-U.S. passport holders line at JFK and the not-so-small issue of the exit tax for relinquishing U.S. citizenship, I would have handed mine back long ago.

By Lauren Cooper

Lauren Cooper is a TransferWise revolutionary, globe-trotting journalist and battle-hardened expat. An expert on life in the world’s most expensive cities, she grew up in New York before doing tours of duty in Hong Kong and London.